St. Louis parent would become big player if union of Priority, CuraScript occurs.

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Chris Kauffmann

Staff Writer

ORLANDO -- With the proposed purchase of Lake Mary's Priority Healthcare Corp., Express Scripts Inc. is about to inject the specialty pharmaceutical services industry with enough competition to make it a leader among leaders, analysts say.

Coming on the heels of the purchase 18 months ago of Orlando's CuraScript Pharmacy Inc., St. Louis-based Express Scripts (Nasdaq: ESRX) will move from fourth or fifth place in the rapidly growing niche market to as high as second if the nearly $3 billion in annual revenues of the combined companies is counted in 2005, they say.

If the $1.3 billion deal is approved by shareholders and regulators, the plan is to fold Priority Healthcare (Nasdaq: PHCC) into CuraScript and the whole operation would be led by CuraScript's chief executive officer, Dom Meffe.

"It was a very good move on the part of Express Scripts," says Gregg Haddad, an analyst with First Analysis Securities Corp. in Chicago. "It significantly enhances its position in the market. It won't be the biggest, but it will be a much more level playing field."

Calling it a "very savvy" decision, analyst John Kreger of William Blair & Co., also in Chicago, says that before the move, Express Scripts -- with $15 billion in 2004 revenue -- was a small player. Its two major rivals in the specialty pharmaceutical market are Medco Health Solutions Inc. and Caremark RX Inc.

"Now it will be comparable, if not bigger, so it certainly makes them more competitive," Kreger says.

Furthermore, Kreger says it was a smart move because specialty drugs are growing at a much faster rate than regular drugs and because Priority not only increases the number of treatment therapies that CuraScript offers, it gives it an additional revenue stream.

Integration work begins

CuraScript is known for its injectable treatments for chronic diseases such as hepatitis, AIDS and multiple sclerosis that it ships directly to the patient. Priority does the same thing, but with different therapies such as oncology and infertility. Additionally, it also ships treatments directly to doctor's offices for therapies that can't be self-administered.

Last year, Priority generated more than $1.7 billion in revenue. CuraScript generated about $600 million in 2004, but it expects to top $1 billion this year.

At this point, even though a Priority Healthcare shareholder has filed a lawsuit to block the deal as being inadequate, analysts say they don't see anything that will stop the merger from closing sometime in the fourth quarter.

Meffe says he has begun working on integration plans for an enterprise he believes is a "great strategic move" that will offer more employment opportunities for people in Central Florida.

"We are very encouraged to work with (Priority) on the integration plan as they have an excellent management team," Meffe says. "This is not about contraction and job loss. It's about expansion."

Priority currently has about 650 employees in two locations in Lake Mary and Orlando, while CuraScript has about 800 employees in buildings located off Lee Vista Drive.

Some "redundant" back office functions will be eliminated, but "for those people taking care of patients and clients, it's a growth opportunity," Meffe says.

CuraScript has hired about 500 people since being bought by Express Scripts and is still hiring at a pace of 30-50 people a month. Most of the new positions are held by nurses, pharmacists, patient care coordinators, pharmacy technicians and information technology people.

More consolidation to come?

Because CuraScript is growing so fast, Meffe says he can't imagine shutting down any of Priority's facilities.

CuraScript is planning to break ground on a 60,000-square-foot building this fall for its own growth needs. "We will need all the space we will have," Meffe says.

With the Priority deal by Express Scripts and with Medco's proposed purchase of specialty drug distributor Accredo Health Inc. of Memphis, Tenn., for $2.2 billion, Kreger and Haddad believe further consolidation of the market is almost a foregone conclusion.

Retail pharmacy companies such as Walgreen's and CVS may want to bulk up in order to compete, so they may cast their eye on companies such as Illinois-based Option Care Inc., which is considered one of the last major independents in the market, the analysts say.

"As we baby boomers age, the consumption side will see strong growth," Kreger says.

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